1. ABC & ABM

Question 1

ABC vs Traditional Absorbption costing

Answer 1

Traditional absorption costing uses an arbitrary method of allocating overheads which is usually based on labour hours, machine hours or units of output. With ABC we take some time to investigate the activities which are actually driving the costs and allocate overheads to products / services based on the resources they consume.

In many businesses overheads costs are a significant proportion of total costs so we must understand what drives these costs in order to manage the business properly. We can then start to control these costs by managing the cost drivers.

ABC can be used for all overheads not just production overheads.

ABC will result in a more accurate cost per unit which should help to improve pricing, performance management and decision making. In addition to this ABC also gives us a better indication of where savings can be made and a deeper understanding of the profitability of each product line enabling businesses to identify any loss making products.

Question 2

Throughput costing and Throughput Accounting Ratio (TPAR)

Answer 2

Throughput